Gazprom close to signing deal with China

Gazprom will become a major natural gas supplier to China as part of a new deal that also includes construction of new pipeline, Russia has announced on Wednesday.

After more than ten years of negotiations, the two super powers have reached the agreement, expected to be signed by Russia’s President Vladimir Putin during his upcoming visit to China.

The deal is a major win for Russia, who seeks to diversify its customer base and reduce its dependency on Europe, especially after the Ukraine crisis.

The deal, which might enter into force by the end of this year, will see Russia building a new pipeline with a capacity of 38 billion cubic metres (bcm) of gas a year.

"Regarding Gazprom's gas contract, the sides are close to agreement ... The only issue remaining is ... the price," said Russia’s deputy prime minister Arkady Dvorkovich, according to Russian news agency Itar-Tass. "We really hope that the contract will be signed in May."

Industry sources said before the latest round of talks that Gazprom could try to secure a deal by proposing a lower price for the gas in exchange for China handing over billions of dollars in upfront payments.

The sources said Gazprom was hoping for a price of $10-$11 per mmBtu (million British thermal units) from China. China is believed to pay $9 per mmBtu to Turkmenistan, the former Soviet state in Central Asia that beat Gazprom to the Chinese market.

Currently, Russia exports a third of its gas to Europe, half of which is delivered through Ukraine. After the annexation of Crimea by Russian forces, Gazprom has cancelled the discount negotiated with the ousted Ukrainian Prezident Yanukovich and is now asking nearly $400 for 1,000 cubic metres of gas, something cash-strapped Ukraine cannot deal with.

The dispute has raised fears Gazprom might eventually resort to cutting off all supplies through Ukraine, which would cause problems in other European countries relying on Russian supplies. Gazprom is particularly opposed to Ukraine’s efforts to use reverse flow technology to buy gas from neighbouring countries.

Russia, extracting more than 10 million barrels of oil per day, exports around 4.4 million bpd of oil in total. So far, only 16 per cent of the exports was being delivered to Asia, with the volumes of exported gas rather negligible.

By 2035, Moscow plans to double the share of oil flows and send a third of its gas exports eastwards, though its plans are constrained by the lack of necessary infrastructure.

Russian Energy Minister Alexander Novak said on Wednesday that Moscow planned to expand its East Siberia-Pacific Ocean (ESPO) pipeline to 80 million tonnes (1.6 million barrels per day) by 2020, as part of its goal to diversify away from Europe.